Slowing growth to put rate hikes on hold

Photo: Mint
Photo: Mint


  • Elevated crude prices would in time hit household consumption and purchasing power
  • There is also little respite in terms of GVA, which captures sector-wise contribution

MUMBAI : The outlook on India’s economic growth is gloomy in the near term. In its second advance estimate, the National Statistics Office (NSO) projected India’s GDP growth at 8.9% for FY22. This is a downward revision from the 9.2% economic growth projected in January. Some economists believe there are risks to the latest estimate, too.

“Elevated crude prices would eventually impact household consumption and purchasing power, which does not bode well for India’s economic growth. So, for FY22, the GDP growth could be lower than the official estimates of 8.9%," said Madhavi Arora, lead economist at Emkay Global Financial Services.

A long haul
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A long haul

There is also little respite in terms of gross value added (GVA). GVA captures the sector-wise contribution. As Gaura Sengupta, India economist at IDFC First Bank said, “Advance estimate implies that FY22 GVA is just 3.1% higher than pre-pandemic levels with trade, hotels, transport, and communication still remaining 10.9% lower than FY20 levels." The NSO’s FY22 advanced estimate, she added, “implies that GDP growth will be just 1.8% higher than pre-pandemic levels (FY20), underscoring the need for continued policy support".

In short, growth has taken a beating over the past two years. Moreover, the impact of the ongoing geopolitical tensions between Russia and Ukraine needs to be closely monitored. Already, Brent crude oil prices are hovering above $105 per barrel. India imports the lion’s share of its fuel requirements, and higher prices take a toll on economic growth and have an adverse impact on inflation.

This unfavourable combination of poor growth and high inflation also means the Reserve Bank of India (RBI) could continue to focus on boosting growth rather than fight inflation immediately. At its policy meeting held in February, RBI maintained status quo on interest rates. The minutes of its meeting showed that RBI has decided to continue with the accommodative stance for as long as necessary to revive and sustain growth on a durable basis and at the same time ensure that inflation remains within its target. In other words, the weaker-than-expected December quarter (Q3FY22) GDP growth of 5.4% and subdued outlook may nudge RBI to lean towards an accommodative policy for longer until recovery is on a stronger footing.

“Against this backdrop of slowing growth momentum, we expect monetary policy to remain accommodative. The policy space to remain accommodative is derived from RBI’s expectation of CPI inflation moderating to 4% target by FY23-end," said Sengupta.

“The RBI projected GDP growth at 6.6% year-on-year in Q4 (of CY2021), thus this (GDP growth) reading is likely to be seen as a negative surprise and on the margin, and may add to the monetary policy committee’s dovish narrative," said analysts from Nomura in a report on 1 March. That said, the brokerage expects a rate hiking cycle to begin from June.

Last quarter, the contact-intensive sector—trade, hotels and transport—was yet to fully recover to pre-pandemic levels and was 4.6% lower (Q3FY22 v/s Q3FY20). “Its labour-intensive nature signals broader economic distress," said Nomura’s analysts, commenting on the sector.

As such, economic growth is expected to decline sequentially in the March quarter. “The bump down in economic recovery would be led by the after-effects of Omicron waves, especially in the contact-intensive services sector, a major component of India’s GDP. Supply-side shocks from the ongoing geopolitical crisis would impact inflation and trade in Q4FY22," said Arora at Emkay Global.

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